For Vijendra Rawat, 42, it has been a long journey from cash to card. When he started working in the early 1990s, almost all his expenses were in cash. Debit cards were not that popular then and the credit card was still a very niche product. It did not help that very few outlets – from grocery to milk to utilities – willingly accepted card payments. It is different today.

In close to two decades, Rawat – now a Delhi-based businessman – barely deals with cash and cannot do without his cards. He owns two credit and two debit cards and with time has figured out the best way to use them. He uses his debit card mostly as an ATM card to withdraw cash.

For almost all his expenses – from buying milk, petrol to even consumer electronics and durables – he uses his credit cards. He rarely shops for any big-ticket items between the 1st and 11th of the month. “I want to enjoy the full month’s credit period,” he says. And he never revolves his credit, settling his credit card bill at the end of every cycle. “If I cannot pay I do not buy. Simple,” he says.

Yes the economy is sluggish. Credit offtake has slumped. And consumer sentiment is low. Yet, electronic cards — debit, credit and pre-paid cards — are posting robust growth. Between 2007-08 and 2012-13, the number of cards issued (except credit cards) has risen. From a small base of around 150 million in March 2008, electronic cards are nudging the 400-million mark today.

More impressive is the secular growth in volume and value of transactions. Credit card spends (in value terms) have more than doubled to Rs 1.23 lakh crore despite a dip in the number of credit cards between 2007-08 and 2012-13. And debit card spends (in value) have risen six times to Rs 74,400 crore during the period. The number of processing terminals too has doubled to 9.5 lakh in these five years. “Where is the slowdown? Our business is doing well. We are upbeat,” says Uttam Naik, head (South Asia), Visa Group

India Warms up to Cards

What Naik doesn’t tell you is that this robust growth in electronic cards isn’t a reflection of perked up consumption. Rather, it is more a reflection of a bigger shift – of India slowly moving from cash to a cashless economy. Today there are close to 350 million debit cards and 19 million credit cards in India. Almost all Indians with a savings account have a debit card.

But they mostly use it as an ATM card. According to Ari Sarker, India country head, MasterCard, Indians withdrew $330 billion of cash from ATMs in 2012. But the ratio of annual transactions to the number of debit cards is just 1.2. Credit cards have had a rollercoaster of a journey – both for consumers and banks.

Till 2008, there were 27.55 million credit cards in India. With the economic boom, aggressive banks including ICICI chased customers and issued credit cards indiscriminately.

But after the 2008 economic crisis, it began to hurt. About 70% of the credit card outstandings were being revolved by customers. At its peak, one in four customers turned NPA then. Banks like ICICI restructured their credit card business and some like Deutsche Bank, Barclays exited the business altogether. Naik of Visa estimates that over Rs 5,000 crore of bad credit card loans were written off by banks in 2009. Some 10 million credit cards in circulation then were cancelled by the banks. Both the banks and customers have since turned wiser. Most banks, led by ICICI, have restructured their credit card strategy. And, like Rawat, more and more customers have become smart users. Just about 30% of the credit card spend is being revolved today and a large chunk of it is in the EMI schemes that banks have launched with companies. NPAs too have fallen from a peak of 25% to under 5%.

Usage & Consumption Trends

So what do we know about electronic card users and usage in India? According to MasterCard, 75% of all card payments are concentrated in the top 20 cities with Delhi, Mumbai and their sub urbs alone accounting for 43%.

Credit cards have a higher share in the discretionary category whereas debit cards dominate in routine expenses like utility payments. About 30% of credit card spends are being done online. At least 10-15% of customers use their cards only online, many from smaller cities. A Visa study reveals that people in the monthly income band of Rs 75,000-100,000 are the most prolific users of electronic cards.

The top five items in household expenditure that have the highest noncash component are clothing and footwear (12%), rent (11%), electricity (4%) and beverages (3%). Bangalore leads other metros in higher usage of cards. While petrol, telecom, consumer durables, jewellery remain one of the fastestgrowing categories for debit and credit cards, new categories like insurance premium too are gaining steam.

While debit cards have had a staid and steady growth in India, credit cards have undergone a structural evolution. The journey of ICICI Bank mirrors these changes well. In 2008, the bank had a 28% spend share in credit cards. Post-2008, it has deliberately trimmed its business and in 2012 had just an 11% spend share.

ICICI Bank has become selective about its new credit card users with 80% of them being existing banking customers. The bank uses the credit scores of Cibil, a credit rating body for consumers, to vet new customers. ICICI Bank has also substantially rationalised co-branded offerings and trimmed the range of products.

For example, from a high of 15 co-branded cards, the bank now has just two major co-branded cards, with HPCL and Jet Airways. “We realised that the largest spends for our customers were on fuel and travel,” says Rajiv Sabharwal, executive director, ICICI Bank.

As part of the new strategy, lifetime free credit cards, so popular in the pre-2008 days, have largely been phased out. Most of their new credit cards come with an annual fee that could vary from Rs 500 to Rs 1.25 lakh. The thrust for banks has shifted from chasing quantity to quality customers. Their new launches, rewards programmes and incentives are structured accordingly. ICICI claims that its diamond credit card has best-in-class offerings unmatched by any.

IndusInd Bank, which bought Deutsche Bank’s credit card business, has 2.5 lakh credit card customers and “focuses on the upper end of the credit card business”, says Anil Ramachandran, head of IndusInd’s credit card business. Its Indulge credit card has a 22-carat gold inlay to give the card a distinctive look and appeal.

Strictly by invitation and with an annual fee of Rs 1 lakh, its customers can hire a yacht, super car or a chartered flight at a discount. The card also has a panel of chefs who can serve up a fancy private meal for 5-10 people for its customers. “There is a premiumisation in the credit card business,” says Visa’s Naik. According to Visa data, spends on Visa Classic, an entry-level credit card, have gone down from 47% in 2010 to 20% in 2013. Visa Premium has gone up from 52% to 74% and Visa Super Premium has risen from 0.6% to 5.7% today.

The India Journey

Debit cards far outnumber credit cards in India, a global trend. But the sharply skewed ratio — 350 million debit cards to 19 million credit cards — may be unique to India, says Naik. With a vast majority of the population at the bottom of the pyramid, credit cards will remain beyond the reach for a majority for a long time. The internet is proving a timely catalyst for an increase in card usage. Growing popularity of online shopping is automatically pushing lot of spends online. In fact a third of all spends on Visa cards in India today come from e-commerce. This segment is expected to surge as e-tailing grows.

The rising sales of smart phones and tablets will help sustain the momentum. “In the West, e-commerce is growing due to convenience. In India, it is growing because it provides accessibility,” says Jairam Sridharan, president consumer lending, Axis Bank. While still very small, mobile card payments should take off in India in a big way, thanks to a slew of innovations in low-cost hand-held mobile swipe devices. Naik of Visa says a mobile device costs almost a third of conventional swipe machines that use leased lines. Globally, mobile swipe devices are becoming popular among self-employed workers like cab drivers.

In India, mobile network swipes were allowed just five months back and today there are already around 20,000 in operation. One of the big hurdles in the growth of card payments in India is poor penetration of terminals. Today there are 9.5 lakh terminals in the country that can process electronic transactions, almost double the 2007-08 number.

That figure should double again in under three years. This will get further catalysed by mobile swipe devices. This shift from cash to cards is part of a larger trend playing out globally. It is a shift that governments and banks are actively encouraging.

Welcome to a Cashless WorldIn 2008, of the $27 trillion spent on global retail purchases, 9.5% was spent by cheques, 42.2% by cash and 27.4% by cards. In 2012, on a total retail purchase of $30.32 trillion, cheque and cash transactions have declined to 7.7% and 38.3% respectively while card payments have increased to 32.8%, according to Moody’s Analytics.

From e-commerce to mobile payments — enabled by cheap and secure technologies like mobile swipe devices — electronic transactions are growing. India is late to this cashless world. A high 96% of all transactions (in volume terms) in India still are conducted in cash, according to a recently released Visa report.

While the share of electronic payments in non-cash payments is rising, cheques still dominate, although it is falling. Between 2009-10 and 2011-12, share of cheques came down from 65% to 52%. But there are reasons why the Indian government would want card payments – in volume and value terms – to rise. One, the cost of printing currency itself is high. In 2009-10, according to the Visa report, the RBI incurred an annual cost of Rs 2,800 crore to just print currency notes.

This does not include the cost of storage, transportation, security, detection of counterfeits, amongst others. The cost of printing and maintaining this extensive amount of cash alone costs the country about 0.2% of its GDP, says the report.

According to Moody’s Analytics study based on 2008-12 data, the growth in the use of electronic cards – which moves money efficiently and smoothly in the economy – added $1.5 billion to GDP. It also says that a mere 5% annual growth of cashless transactions saves India over Rs 500 crore annually. Not to forget that all electronic transactions get captured within the banking system and hence boost transparency and generate additional government revenue through tax.

Thrust on Consumer Safety

Not surprisingly, the RBI is doing all it can to push card growth. Its recent ban on 0% EMI schemes – a popular initiative among consumer companies – in a quest for transparency may appear contradictory to this resolve. But it may well not be. Here’s how the schemes worked. On purchase of a costly product with credit cards, many companies collaborated with credit card companies to offer a scheme whereby customers can pay back in 6-12 equal instalments. In 0% EMI schemes, typically there are hidden costs (like a processing fee) that banks charge and customers do not know about. Also, often gullible customers are not told of the cash discounts that they would have got had they bought the product by paying cash.

The RBI wants banks to provide full disclosure to the credit card customers and help them take an informed decision. The RBI directive – just ahead of the festival season – may have come at the wrong time. For both credit card companies and consumer durables/electronics firms, the scheme helped bring additional business.

A senior banking sector executive estimates that during peak season the credit card companies’ business exposure to EMI-led schemes would be 10-15%. “Our exposure is minimal. It will be a challenge for consumer companies,” the bank executive said on condition of anonymity. For the consumer durables industry, the exposure to EMI schemes could be as high as 30%, says Shantanu Das Gupta, V-P (corporate affairs), Whirpool India. “But our exposure is under 10%. The impact for us is minimal,” he clarifies.

Whatever the extent of impact, there is no denying that the banks and companies will feel the heat and they will have to figure out new marketing gimmicks to push sales this Diwali. The RBI is also pushing for more secure card transactions as instances of card frauds rise in India. In 2011, it had asked banks to add another layer of security and introduce a secret PIN that card users must punch into the terminal to authenticate payment. After many deadlines and delays, this directive will finally come into force next month.

While the banks are still not fully prepared, the RBI has ordered them to compensate cardholders in seven days if any fraud occurs on non-compliant terminals. And if the bank fails to refund the disputed amount in seven days it has to compensate the card holder with a penalty of `100 per day until the date of payment. Right now, dispute resolution is a cumbersome process and can take several weeks in case of credit card frauds.

Consumers Watch Out

While the RBI is doing all it can to protect card customers, users too must be cautious, particularly credit card customers. As the economy slows down and news of layoffs hit headlines, credit card outstandings are expected to rise. “It is time to be more cautious. The pace of growth [for the industry] is likely to moderate as layoffs hit headlines,” says Sridharan of Axis Bank. With credit bureaus like Cibil and Equifax around, increasingly more and more institutions and service providers – like telecom, insurance and even employers – are using credit scores as part of background checks on individuals. Arun Thukral, MD, Cibil says today it has a memberbase of 1000 companies and a customer database of 300 million.

Spotting opportunity, Arun Ramamurthy has cofounded Credit Sudhaar, a company that helps Indians improve their credit scores. Founded in 2010, it is growing rapidly and today has a presence in eight cities with over 6,000 clients. Recently, a Hyderabad-based BPO executive came to Ramamurthy desperately seeking help. He had Rs 10,000 outstanding in his old credit card bill which he had not settled and it had grown to Rs 56,000.

With a poor credit score, his new employer rejected him. “We helped him settle the debt and improve his credit score,” he says. Similarly, a 31-year-old private sector bank executive came for help as he had to forego his promotion due to a background check that revealed a poor credit score. He also had as a client a father whose son’s admission to a top Delhi school was rejected because of an error in his credit report that resulted in a poor score. “We had to work with the credit bureau to get the error rectified,” he says. But that may well have been a lesson for the father to keep a closer tab on credit card spending and payments.

Credit Sudhaar is India’s first Credit Health management & improvement company whose goal is to help clients to Restore, Enhance and Protect their Credit and make them credit healthy.